The Guernsey Investment Fund Association brings together Jo Gill, Director of PEA, Annette Alexander, Partner of Carey Olsen, and Claire Bufton, Audit Manager at Saffery Champness, to discuss how regulation is defining private equity service provision.
How is international regulation shaping up?
Jo Gill: In Europe the Alternative Investment Managers Directive (AIFMD) has driven the approach. EEA countries had to enact local legislation to implement AIFMD so have focused on key themes like corporate governance, risk management, transparency and disclosure to investors.
Annette Alexander: In the US transparency on fees and expenses has dominated the debate. It's anticipated that the FCA will also adopt a similar focus. Cybersecurity is also top of the US agenda and, globally, financial crime prevention is a concern.
Claire Bufton: Transparency remains a prominent theme and analysis of private equity structures being used for tax efficiency continues worldwide. This has prompted new legislation in several jurisdictions including the UK.
What is the impact on investor decision making?
Claire Bufton: Frequent significant regulatory change alters the appeal of a jurisdiction. The medium to long-term nature of PE investments means that investors can be reluctant to invest significant funds in jurisdictions where this happens.
Jo Gill: We see investors conducting wider due diligence to protect committed funds from risks in deficiencies in corporate governance, service provider supervision or IT and operational controls. So, providers have to deliver the depth and detail of information that provides comfort.
Annette Alexander: A well-regulated jurisdiction is essential for many institutional investors in these times. Negative publicity is a headline risk which will be unacceptable to certain investors. Adverse publicity is as damaging as poor performance to a fund so a jurisdiction which has questionable regulation may be unacceptable.
What factors help to define Guernsey's regulatory environment?
Jo Gill: Conduct of business frameworks apply across Guernsey's industry however regulation is implemented proportionally to the size, nature and complexity of business. Supervision by the GFSC is risk sensitive. Smaller fund managers must implement suitable and effective governance and conduct of business frameworks. The necessary familiarity of fund professionals with good governance is a selling point for Guernsey's talent offering.
Claire Bufton: The board environment is a defining characteristic. Guernsey's non-executive director market is competitive and board appointment processes are rigorous. There is a firm spotlight on director performance and Guernsey boards operate within strong governance frameworks. Compliance professionals hold senior roles and, often, directorships.
Annette Alexander: Guernsey is well regarded internationally and has proportional regulation with a fair but pragmatic and approachable regulator. The accessibility and agility of our regulator and government departments are stand-out features which make it easy to do business in Guernsey.
How are you seeing the service provider environment develop?
Claire Bufton: Offshore, strategies like blockchain technology and increasing compliance costs are putting traditional service operators at risk. The larger operations that have invested in new strategies should see benefits. Onshore, service providers will be keen to remain in step with the ongoing context of regulatory change to compete with Germany, Switzerland and the US – all favorable PE jurisdictions.
Globally, the PE industry has moved into the longer-term investment environment of 'buy and transform'. This is prompting clients to aim for cost reductions, innovation and service providers who see the broader picture and identify efficiencies, such as through innovation in the world of big data.
Jo Gill: Many onshore jurisdictions cannot match the plethora of talent and experience in Guernsey. Moving is expensive for smaller managers and the challenge of finding affordable and experienced onshore providers has been avoided by outsourcing administration back to Guernsey to ensure service continuity. Human capital will dictate the ability of onshore service providers to offer the standards that investors and fund managers expect.
Annette Alexander: Guernsey boasts some of the most advanced digital filing systems to ease the submission of regulatory reporting and is adopting fintech solutions. Northern Trust's and IBM's launch of the first ever commercial deployment of blockchain technology for the PE market demonstrates this.
An original version of this article was first published by BVCA Journal, June 2017.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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